This article was revised on June 11, 2020 to reflect the latest updates to the Small Business Administration's (SBA's) Paycheck Protection Program (PPP). Please visit the SBA site for the most current details.
As a responsible business owner concerned about retaining your employees during the coronavirus pandemic, you immediately applied for a loan through the PPP. And you were fortunate to be among those who received one.
But your work isn't done. Being a responsible business owner also means following PPP instructions so that your loan will be forgiven. That may yet prove to be difficult.
A Work in Progress
The PPP initially stipulated that as long as 75% or more of PPP funds went toward payroll costs within eight weeks, the loan would be forgiven. When the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) was signed into law on June 5, these two thresholds changed. Now, businesses must put at least 60% of PPP funds toward payroll costs within 24 weeks for loan forgiveness.
The PPPFA also included revisions affecting the calculation of full-time employees and deferring payment of the employer share of the Social Security tax.
Two other important changes to the PPP were previously announced in an FAQs document that the SBA released on May 13.
First of all, in response to larger businesses and franchises attempting to tap into PPP funds, the SBA wrote: "[I]t is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification."
Of greater relevance to small businesses, the May 13 FAQs also stated that companies receiving PPP loan amounts of under $2 million "will be deemed to have made the required certification concerning the necessity of the loan request in good faith." That is, the SBA is assuming the pandemic has caused economic harm for your business — you won't need to show proof of financial hardship to be eligible for loan forgiveness.
As Forbes points out, though, this clarification "doesn't negate other requirements of the PPP program such as tracking how much money went to qualifying expenses like payroll and rent." So for independent small businesses that met the original PPP criteria — and it's worth reviewing what they were at the start — the best bet is to make a good-faith effort to meet the terms as you understand them and to control what you can control.
Going by the Book(keeping)
The simplest way to establish a good-faith attempt at compliance is through complete documentation of your PPP loan disbursement, supported by bookkeeping best practices. Here are several ways to make tracking and document your loan spend easier:
- Open a separate bank account for your PPP funds. This is a best practice as it establishes a clear "before" and "after" demarcation that makes tracking much easier.
- Be consistent. Set up a process to ensure accurate recording. What software will you use? Who will enter the data? When will they enter the data? Recordkeeping needs to be accurate, timely and systematic.
- Create a dedicated category for tracking PPP funds in your bookkeeping and accounting systems. The better job you do of avoiding intermingling PPP funds with any existing accounts, the easier it will be to follow the money.
- Keep track of your spend. Set up a worksheet to record and track your spend with a running tally per week. You need to see the full spend in one place so you can calculate the total spend for your eligible payroll costs and other eligible business costs. (Remember: 60% dedicated to payroll is the key benchmark.)
- Establish controls. Assign a second person to oversee the bookkeeper's work to make sure there are no mistakes. Set up a weekly review process.
- Maintain adequate documentation. It's important that you not only document your financial records in an appropriate format, but also that you store that documentation in a safe and central place, with adequate backup. In other words: If you're not already on the cloud, you need to be.
Don't Hesitate to Seek Help
Tracking loan spend properly can help ensure your loan will be forgiven. It's worth making sure you have a qualified bookkeeping professional oversee this process. An outsourced bookkeeping services provider will have the remote capability, the cloud-based tools and the processes in place to accurately track your PPP loan spend.
It's worth repeating: You are a responsible business owner. You've done all you can to safeguard your business and employees and to adhere to the SBA's ever-evolving guidelines. Now the best thing you can do is let your bookkeeping services provider stay on top of the details as you begin mapping out a strategy for moving your business forward once your PPP loan runs out.